Tuesday, April 8, 2014

The U.S. Court of Appeals for the Ninth Circuit recently held that, under 28 U.S.C. § 1348, a national bank is a citizen only of the state designated in its articles of association as its main office.

In so ruling, the Ninth Circuit stated that Wachovia Bank, N.A. v. Schmidt, 456 U.S. 303, 307 (2006), did not address whether a national bank is also a citizen of the state where it has its principal place of business.

The Ninth Circuit now joins the Eighth Circuit, noting differing rulings in the other circuits.

The borrowers (“Borrowers”) sued their lender (“Bank”) in state court alleging causes of action under state and federal law pertaining to their home loan. Bank removed the action to district court, asserting subject matter jurisdiction on the basis of federal question and diversity citizenship.

Borrowers filed an amended complaint but this time raising only state law claims. Following an order to show cause why the case should not be remanded for lack of diversity jurisdiction, the district court held that national banks are citizens of the state where their principal place is located, as well as the state where their main office is located as designated in their articles of association. Because the Bank’s main office as designated in its charter is in South Dakota and its principal place of business is in California, and the Borrowers are citizens of California, the district court remanded the case for lack of jurisdiction.

The dispositive issue on appeal is whether, under 28 U.S.C. § 1348, a national bank is a citizen of both the state in which its principal place of business is located and the state where its main office is located as designated in the bank’s article of association.

As you may recall, the citizenship of national banks is governed by 28 U.S.C. § 1348, which provides in pertinent part: “All national banking association shall, for the purposes of all other actions by or against them, be deemed citizens of the States in which they are respectively located.” 28 U.S.C. § 1348.

The Ninth Circuit began its analysis by focusing on the meaning of the word “located,” as the term is not defined under the statute.

Both the Fifth Circuit and Seventh Circuits have held that national banks are not “located” in every state where the bank has a branch. See Horton v. Bank One, N.A., 387 F.3d 426, 431 (5th Cir. 2004); Firstar Bank, N.A. v. Faul, 253 F.3d 982, 993-94 (7th Cir. 2001).

By contrast, the Fourth Circuit held that a national bank is a citizen of the state in which its main office is located as well as every state in which it has a branch. See Wachovia Bank, N.A. v. Schmidt, 388 F.3d 414, 432 (4th Cir. 2004). The Second Circuit recognized the same in dicta. See World Trade Ctr. Props., LLC v. Hartford Fire Ins. Co., 345 F.3d 154, 161 (2d Cir. 2003).

The Supreme Court granted certiorari in Wachovia Bank v. Schmidt, and held “that a national bank, for § 1348 purposes, is a citizen of the state in which its main office, as set forth in its articles of association, is located.” See Wachovia Bank, N.A. v. Schmidt, 456 U.S. 303, 307 (2006). However, Wachovia Bank v. Schmidt did not address whether a national bank is also a citizen of the state where it has its principal place of business.

Following Wachovia Bank, the Eighth Circuit addressed the exact issue in this appeal and held that a national bank is only a citizen of the state designated in its articles of association as its main office. The Eight Circuit concluded that the world “located,” as used in the 1948 version of § 1348, could not mean both main office and the principal place of business because citizenship for state-chartered corporations based on principal place of business did not exist until ten years later when Congress passed § 1332 in 1958. The Ninth Circuit agreed.

Although the Ninth Circuit viewed the Supreme Court’s declaration in Wachovia Bank on the scope of § 1348 to be definitive, the Court also determined that the historical landscape of § 1348 and its interaction with § 1332(c)(1) to supports its conclusion.

Accordingly, the Ninth Circuit held that the national bank defendant is a citizen only of South Dakota, the state of its charter address, and reversed the district court’s judgment and remanded for further proceeding.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.